Business Valuation



Case 1.
An investing group is willing to invest in Applied Materials. Applied Materials Inc. provides
manufacturing equipment, services, and software to the semiconductor, display, and related
industries. One of their doubts is that they think that the stock price is too high related to
the earnings per share (P/EPS = 33,23x). One of the investment manager of this group asked
an analyst to conduct an assessment of Applied Materials, especially the possible managerial
flexibilities embodied in the stock price.
The assignment is to make a report on this company and then specifically with regard to the
possible flexibilities embodied in the stock price. You, as analyst, have to write a report
which consist of three parts. The first part is where you do your qualitative analysis and the
second part the high-over calculations. You will conclude with an advice to the investment
manager regarding the possible managerial flexibilities in relation to the stock price.
Some guidelines regarding the report:
Part (1): Qualitative analysis
• Give a brief description of the company plus the possible inherent managerial
flexibilities. Based on which indicator(s) could you expect that managerial flexibilities
are present? If you compare this company with two other look-alike companies
(ASML and Lam Research Corp.), do you think this company has more flexibilities
compared to these two other companies?
• Regarding these possible managerial flexibilities you have to describe the connected
real option applications / strategies.
• In describing these real option strategies you have to be precise regarding the data
you need to calculate the value of these real options.
• How will these managerial flexibilities influences the firm’s asset beta? Can you give a
brief description of what you would expect of the level of beta for this company
given the formulated managerial flexibilities (high over analysis without any
• Maximal number of words regarding this part: 500.
Part (2): High-over calculations
In the excel-file relevant data is provided to conduct your analysis regarding this company.
You may assume that all data is related to the year-end positions (actually it is dec-13
(balance sheet) and oct-28 (P&L)).
The task is to determine the part of the Enterprise value which is related to the managerial
flexibilities and which is related to the Assets-in-Place. Additionally, try to determine real
option Beta and the expansion factor. If you have the expansion factor it should be possible
to determine the value of the expansion option where you may assume that the time to
exercise is T=5 and the investment for expanding $ 10.000(kk) – use for this calculation the
Black & Scholes formula. If you have determined this option value you can determine the
unexplained part of the managerial flexibility value.
You have to conduct your analysis regarding this task as of 31-12-2019 and 31-12-2020.
In executing this task you can use the following guidelines.
Data regarding the Cost of Capital:
The Wacc can be determined based on the following equation:
���� = �! − (�! − �) ∗ �
∗ �� (1) (����� ���� & ���ℎ ���� �����ℎ ������)
Determination of the Value of the Assets-in-Place:
Regarding the A-i-P value of this company you may assume that the company is stable and
that you can use the terminal value approach. In this respect you can use the terminal value
approach of Holland which can be written as,
31-12-2019 31-12-2020
Rf 2,00% 1,65% US Government Bonds 30y
MRP 4,72% 4,72% Damodaran N-America
Correlation i,m 0,60
Asset Beta AiP 0,80 (based on the industry) Sigma M. 15,00%
Growth rate AiP 1,50% Sigma AiP 20,00%
�” = ��#$/$& +
��#$/$& ∗ (���� − ����)
���� − � + � + � ∗ � (2)
The central issue in executing the Value Driver Formula (as discussed in class) is whether a
high excess return (Roic – Wacc) assumed in the terminal value is consistent with a
competitive economy in which even the typical large firm has difficulty earning more than its
cost of capital. If this excess return is too high, it is arguable to downsize this excess return
gradually or exponentially over time (“n” years). This means that the Value Driver Formula
must be adjusted with an “adjusted fade rate” called “f” (Holland, 2018).
��#$/$& = Invested Capital (book value equity + debt – Cash & ST-investments).
Roic = Return on invested capital -> ���� = ‘()*+!”#$
f = 1 − E .
In this case you may assume that the spread (“S”) after 10 years (“n”), based on the actual
spread (Roic – Wacc), is 10% (“S”).
Equity Beta & Asset Beta:
I have provided market data (excel-file) regarding this company and the market (MSCI
World). Based on these data you are able to determine the equity beta. You can use the
Hamada-equation (see Principles of Bus.Val. course) to un-lever this equity beta into the
firm’s asset beta.
Provide your excel-file to show your calculations.
Part (3): Advice
Base your advice on the analyses of the two parts in maximum 250 words.
Case 2.
Nikon Corporation (Nikon) is planning to start a new venture for developing a high tech
printing device. The Manager Strategy, Jason Yong, presented the business case to the board
of Nikon. Based on this business case an investment is needed of $ 21.000k. He already
discussed the case with a financial institution which is willing to lend the new venture a loan
of $ 13.650k at an annual interest quote of 2% with a maturity of 4 years (zero-coupon loan,
in full to be repaid at the end of year 4). This loan is 65% of the total investment amount,

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